2024 Articles - Suits the C-Suite - Page 2 | SGV & Co. | EY

09 September 2024

Marie Stephanie C. Tan-Hamed

What matters to APAC boards in 2024

IN BRIEF: 60% of Asia-Pacific board directors identify economic conditions as their top concern for 2024Despite the increasing severity of climate-related risks, only 21% of Asia-Pacific board directors consider climate change a priorityDemand for data analysts in the Philippines outpaces graduate supply, creating a skills gap due to misalignment between education and industry needs PULL QUOTE: “Boards must keep their finger on the pulse of economic indicators to be able to pivot strategies effectively—and quickly—across multiple fields of play when required.”The Asia-Pacific region is proving its mettle amidst increasing economic and geopolitical complexities. However, for boardrooms across the region, maintaining a competitive edge will require more than just resilience. It calls for an agile, globally interconnected approach that can quickly adapt to the shifting landscape.While much of the world braces against economic headwinds, the Asia-Pacific region is positioned to lead the charge and expected to contribute nearly 60% of global GDP growth in 2024, surpassing pre-pandemic benchmarks. Underpinned by robust performance across national economies, this optimistic outlook has nearly three-quarters of Asia-Pacific CEOs forecasting higher revenue growth and profitability for the year ahead.However, this promising forecast comes with its own set of challenges. Boardrooms are under pressure to navigate a mix of pressures — with inflation, rising labor costs, and geopolitical tensions topping the list of concerns. The latest 2024 EY Asia-Pacific Board Priorities survey shows that economic conditions are the primary agenda of 60% of board directors this year. Beyond these economic pressures, capital allocation and talent shortages are also emerging as key pain points that boards need to tackle head-on. Given these dynamics, boards must keep their finger on the pulse of economic indicators to be able to pivot strategies effectively—and quickly—across multiple fields of play when required. This article will discuss the critical challenges Asia-Pacific boards face in 2024 and strategies to turn them into competitive advantages in the evolving global marketplace. Capital allocation pressureAs inflation, rising operational costs, and diminishing pricing power bite the bottom line, Asia-Pacific boards are moving their focus from growth-at-all-costs strategies to a more nuanced focus on financial discipline. The survey reveals that two-thirds of directors are increasingly concerned about capital availability, with 56% grappling with the complexities of mergers and acquisitions, restructuring initiatives, and divestiture decisions.Despite the unique challenges of the current economic landscape, boards can still rely on fundamental oversight practices in capital strategy. These practices include regular reviews of capital budgeting and strategic plans to ensure agility and alignment with corporate objectives, maintaining a competitive edge in the global marketplace. Boards should also prioritize the right metrics, balancing short-term key performance indicators with long-term value creation goals and using a balanced scorecard that integrates financial, non-financial, and qualitative indicators.The rise of Gen Z workforceTalent management is one of the most crucial priorities for Asia-Pacific boards as they prepare for an AI-driven future. By 2025, Generation Z—those born between the mid-1990s and 2010—is expected to make up 27% of the region’s workforce. This generation is characterized by being digital savvy, having a purpose-driven mindset, and a preference for flexibility.Given these traits, boards are challenged to reimagine their approach to talent development. Those that successfully integrate the unique perspectives and skills of this generation can gain fresh insights, enhancing their capacity to innovate and stay competitive. However, achieving this requires more than merely recognizing the value of younger talent. Boards must foster an organizational culture that prioritizes innovation and embraces diversity, equity, and inclusion. AI-fueled people-centric futureAsia-Pacific boards are rapidly embracing Generative AI, with 40% of directors prioritizing digital transformation and business model changes in 2024. As AI-generated data becomes more prevalent, boards must ensure executives exercise proper oversight, making data governance a key priority. Companies must establish guardrails and ensure compliance with evolving regulations.Meanwhile, the growing reliance on data-driven decision-making and AI is sharply increasing demand for specialized skills in data science and AI. A report by the Philippine Institute for Development Studies (PIDS) highlights a rising demand for data analysts in the country, but higher education institutions are currently falling short in producing enough graduates to meet this need. The report highlights that data science and analytics skills remain underdeveloped within the Philippine workforce due to a disconnect between educational institutions and industry requirements. Although several undergraduate degrees, such as computer science, business administration, statistics, and others, serve as pathways for data science and analytics (DSA) careers, they currently lack specific training tailored to industry demands. This highlights the need for boards to recognize the strategic value of these skills and take proactive steps to develop the talent essential for long-term growth and innovation.Thriving in Asia's green economyAs Asia continues to position itself as a key player in the global green economy, businesses across the region have a unique opportunity to capitalize on this shift. The Philippines, for instance, has made significant strides in climate action, ranking sixth out of 67 countries in the 2024 Climate Change Performance Index (CCPI) and fifth out of 10 countries in the Southeast Asia Green Economy Index. These feats underscore the country's progress in reducing greenhouse gas emissions and developing renewable energy. However, both highlight the country's ongoing challenges in climate policy and ambition, revealing a significant gap in government and corporate decarbonization strategies.For businesses to thrive in Asia’s burgeoning green economy, boards must adopt a long-term, strategic approach. While current returns on clean energy investments may lag behind traditional sectors, the potential for future growth is immense. As highlighted in the 2023 EY Global Board Risk Survey, the most resilient boards are those willing to sacrifice short-term financial gains for the long-term benefits of environmental, social, and governance (ESG) commitments.To truly capitalize on Asia’s green economy, businesses must align their capital allocation with ESG objectives, ensuring that their strategies are not just reactive but proactive in driving sustainability. This requires a commitment to meticulous planning, sustainable investments, and the integration of ESG into the core business model.The climate urgencyDespite the urgency of the climate crisis, it remains a secondary concern for many Asia-Pacific boards, with only 21% of respondents identifying it as a critical issue. Nearly half of these directors cite insufficient information as a barrier.The recent EY Sustainable Value Study reveals that some organizations are scaling back their commitments to net zero and modestly reducing investments in sustainability. Larger organizations, particularly those with revenues exceeding USD $5 billion, are more likely to prioritize climate action (47%) compared to their smaller counterparts (13%). However, this shortsightedness threatens the long-term sustainability and resilience of these businesses.To thrive in a decarbonizing economy, boards must recognize climate action as essential to long-term value creation rather than a mere compliance issue. By embedding ESG considerations into their strategies, boards can move sustainability from aspiration to committed action.What it means to be future-fit Asia-Pacific boards must embrace a transformative mindset and develop tailored governance models to navigate 2024 and beyond. While the need for change is evident, the path forward will vary by organization, depending on their current state, maturity, and strategic vision. Prioritizing key issues, reassessing long-term purpose, and defining what it means to be future-fit will be essential for boards. Marie Stephanie C. Tan-Hamed is a Strategy and Transactions (SaT) Partner and the PH Government and Public Sector leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

02 September 2024

Ryan Gilbert K. Chua

How digital transformations can drive organizational success

IN BRIEF:Companies can keep pace with rapid technological advancements by embracing digital transformation, upskilling employees to work with AI, and ensuring cybersecurity to protect digital assets.The success of digital transformation is closely tied to human emotions, necessitating leaders who prioritize empathy and a people-focused approach. Organizational agility, clear governance, and data governance are key to navigating the complexities of digital transformation. PULL-QUOTE: “Successful digital transformations require effective leadership, talent enablement, organizational agility, cybersecurity, and clear governance policies. By prioritizing these pillars, organizations position themselves for success and ensure their sustained growth and competitiveness.” In this fast-paced digital age, businesses are compelled to continuously innovate and adapt to maintain their competitive edge. The advent of groundbreaking technologies is disrupting traditional practices, compelling companies to undergo digital transformation—a complex process that requires substantial investment.This transformation goes beyond merely adopting the latest technologies; it necessitates bridging the skills gap. As artificial intelligence (AI) gains prominence, there's a growing need for a workforce adept at integrating AI into their workflows, mirroring the agility of startups that rapidly modify apps based on user feedback.Cybersecurity is equally critical, with data breaches underscoring the importance of safeguarding digital assets as fervently as one would secure a physical storefront. Furthermore, robust governance policies provide the strategic direction needed to navigate the digital domain, akin to a CEO's decisive investment in blockchain for enhanced supply chain transparency.Digital transformation is a concrete shift in business operations, using technology to transform processes and services. EY exemplifies this with its EY Digital Audit, which integrates three platforms: EY Canvas, EY Helix, and EY Atlas.These platforms have transformed EY's auditing process. EY Canvas facilitates global team and client collaboration, EY Helix employs advanced analytics on financial data, and EY Atlas acts as a digital repository for current accounting standards and insights. The EY Digital Audit helps ensure that EY firms around the world provide a consistent audit across more than 150 countries, linking over 120,000 EY professionals.When executed effectively, digital transformation reshapes the entire business ecosystem, yielding enhanced results for clients and stakeholders.Unpacking the Digital Investment Index (DII)The EY-Parthenon Digital Investment Index reveals a surge in digital investments as companies race to launch tech-driven offerings. A significant 55% of executives report digital upgrades boosting customer experience. From 2020 to 2022, firms reaping benefits from cloud and Internet of Things (IoT) technologies jumped by 54%, reflecting a trend towards AI and machine learning to enhance customer interactions and gather insights. However, those lagging in adapting strategies risk falling behind. These findings highlight certain factors that underpin successful digital transformations: leadership, capacity, agility, data and cybersecurity, and clear governance.Human-Centric Leadership in Digital ChangeEY Teams and Oxford's Saïd Business School research highlights the crucial role of human emotions in digital transformation success across various sectors. It points to the importance of empathetic leadership that prioritizes people to enhance performance and drive growth. Leaders should champion technology while ensuring its smooth incorporation into everyday tasks. They must foster innovation, adopt new technologies, and safeguard employee well-being to stimulate change from the ground up. EY exemplifies this by embracing remote working technologies, with leaders integrating tools like Microsoft Teams to facilitate seamless remote collaboration, mirroring the effectiveness of in-person engagement. EY wavespace™ centers embody EY's commitment to innovation, providing a collaborative space for teams to explore technologies like AI and blockchain, fostering a culture that values tech integration and employee well-being for digital transformation.Empowering the Workforce for the AI RevolutionThe EY 2023 Work Reimagined Survey reveals that a significant 84% of employers expect their employees to engage with generative AI (GenAI). To capitalize on GenAI's capabilities, companies must prioritize extensive training, ensuring their teams not only use new tools but also possess a comprehensive understanding and proficiency in them. In the face of digital evolution, closing the skills gap and providing upskilling avenues is essential for enhancing workforce competencies. This investment in human capital is crucial for maintaining a competitive edge. Customized learning and development (L&D) programs are key, preparing employees to adeptly manage and exploit digital advancements like GenAI. Cultivating a culture of ongoing learning and flexibility enables organizations to become more robust and positions them to navigate the future of work with a workforce that is agile and digitally savvy.Recognizing and unlocking the full potential of their workforce is essential for any organization's digital evolution. This leadership approach ensures that technology serves people and not the other way around, paving the way for a transformation that is both progressive and human-centered.Cultivating Agile EnterprisesIn the face of technological evolution, the agility of an organization is paramount for successful digital transformations. Companies must be adaptable and forward-thinking, swiftly converting emerging trends into chances for growth. Agility is also anchored in data-centric decision-making. By harnessing data analytics, organizations can discover valuable insights that inform strategic choices and propel digital initiatives.A flexible business and tech framework is essential for supporting transformation efforts. However, many companies grapple with legacy systems, inflexible structures, and compartmentalized operations. Leaders must focus on harmonizing their tech infrastructure with their overarching business goals to foster a responsive and integrated environment.EY demonstrates agility through its adaptive approach to business and technology. The firm actively replaces legacy systems with scalable cloud-based solutions, allowing for a more flexible and integrated tech infrastructure. This shift enables EY to respond quickly to market changes and client needs.Maximizing Data Potential with Robust SecurityAs digital strategies advance, organizations face increased risks of cyber threats and data breaches. To counter this, they must deploy comprehensive cybersecurity measures, robust data protection tools, and stringent privacy protocols. Data is the cornerstone of technological progress and must be managed with strategic care and caution.Safeguarding data is only part of the equation—effective data governance is also essential for organizations to unlock the full value of their digital assets. This means not only protecting data from external threats but also ensuring its quality, accessibility, and ethical use within the organization. With the right governance framework, companies can confidently leverage their data to drive innovation and maintain a competitive edge in the digital landscape.Implementing Clear Governance FrameworksThe intricate nature of any transformation demands substantial resources. Amidst this complexity, there's a danger of straying from the initial business goals, potentially slowing progress or even sidetracking the entire transformation effort. To mitigate this risk, it's crucial for organizations to define their desired business outcomes from the outset.Leaders play a pivotal role in crafting and enforcing detailed governance policies and a decision-centric operating model. By doing so, they provide a clear roadmap that aligns the transformation process with the organization's strategic objectives, ensuring that every step contributes to the momentum needed to achieve a successful transformation.Charting the Digital CourseIn today's digital landscape, staying competitive means embracing innovation. Leaders must ensure digital transformations are in sync with their immediate and future objectives, including a commitment to long-term strategies and a focus on people. Awareness of employee well-being, tech progress, and emerging cybersecurity threats is key to adapting digital strategies amid new challenges.Crucial to this journey are effective leadership, talent empowerment, agility, cybersecurity, and definitive governance. By valuing these elements, organizations can navigate the digital terrain, secure ongoing success, and maintain a competitive edge. Ryan Gilbert K. Chua is the Business Consulting Leader and Technology Assurance Leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

26 August 2024

Roderick M. Vega

Keeping up with advances in employment fraud

As the global economy shifts towards recovery, organizations are ramping up their defenses against the threat of employment fraud. The hiring landscape, ever-evolving and increasingly digital, presents various opportunities for deceitful practices. Impersonation, falsification of qualifications, and sophisticated phishing attacks are just a few of the tactics employed by fraudsters to infiltrate companies.Employers who place their bets on seemingly promising candidates without conducting thorough background checks are especially vulnerable to fraud. Impersonation, hiding information, falsifying facts, placing proxy attendees during work evaluations, multiple affiliations, and phishing attacks on job portals have been increasing given the advent of technology.The Report to the Nations 2022 by the Association of Certified Fraud Examiners (ACFE) reports that nearly half of the organizations that fell victim to employment fraud (43%) had bypassed comprehensive background checks in their hiring processes. This data highlights the need for a more diligent and nuanced approach to candidate verification, one that balances thoroughness with the realities of the modern job market.The shortcomings of traditional background screening methods Currently, the hiring industry relies almost entirely on multiple third-party verification vendors who physically visit addresses to check the claims made by prospective employees. In one of the surveys conducted by EY, as many as 59% of the LinkedIn poll respondents revealed that their organizations employ third-party intermediaries for pre-employment background checks, while 18% conduct manual checks, and 9% onboard employees without any employment verification at all. However, the manual process is not only time consuming but also prone to human error as well as allowing room for misinterpretations. As many as 14% of the LinkedIn poll respondents confided that their current manual verification process is filled with errors while 66% felt that their current method is time consuming. The costs involved and the exposure of employees’ Personal Identifiable Information (PII) data and the challenges it entails additionally weigh heavily on employers. Physical verification methods alone are almost redundant given that fraudsters are devising more technically advanced scams. On the other hand, making the process non-virtual makes the process transparent, reduces the chances of employees submitting doctored documents, and ticks all the boxes of data privacy compliance.Navigating the evolving technological landscapeThe rise of the gig economy and the shift to remote work have compounded the difficulty of tracking a candidate's employment history. Traditional verification methods, which often involve third-party vendors personally verifying claims, are becoming increasingly outdated. These methods are not only slow and prone to human error but also raise privacy concerns as they involve the handling of sensitive personal information.While the fraud menace threatens to arrest the application of technological advancement in the hiring space, the answer to the dilemma lies in tech itself. The development of employee background check tools has led to a complete overhaul of pre-hiring formalities. Technology supported checks have helped simplify the methodologies for companies to identify anomalies in the overall assessment of the candidate’s past employment experiences. Scaled and customized to fit the hiring prerequisites of diverse industries, these models also have a shorter turnaround time as compared to traditional methods, making for a swifter hiring experience.Digital address verification, face-match technology, and geotagging are other methods being employed to identify inconsistencies in photographs and validate the authenticity of the claims made by candidates. These solutions are more efficient and offer a higher degree of accuracy and compliance with data privacy standards.The ethical use of technology in hiringAs we integrate these advanced tools into our hiring processes, it is imperative to consider the ethical implications. It is crucial to ensure that these technologies are used responsibly and that they serve to enhance, rather than replace, human judgment. Technology strengthens our hiring defenses, yet it cannot guarantee absolute protection against fraud.While these technological advancements significantly enhance our ability to detect inconsistencies and fraudulent claims, they are not foolproof. It is important to acknowledge that no system can guarantee a completely fraud-free hiring process. The goal is to reduce the risk of fraud and to build a more trustworthy workforce.Revolutionizing hiring Looking ahead, the potential for further technological advancements in hiring is vast. Machine learning algorithms are becoming increasingly adept at analyzing vast amounts of data to identify patterns that may indicate fraudulent behavior. Blockchain technology holds the promise of creating secure, immutable records of candidates' employment histories, education, and credentials.HR departments play a critical role in navigating this new landscape. They must be adept at using these technological tools while also maintaining a human touch. It is their responsibility to ensure that the hiring process remains fair, equitable, and free from discrimination.In an era where hiring practices are being redefined by digital innovation, it may be crucial to consider engaging the services of an experienced and technologically enabled third-party who can do precise and regulatory-compliant models to expedite and secure pre-employment checks. This way, companies will be able to harness the power of data and technology to hire human resources with verified profiles, enabling a more secure and reliable recruitment process. Roderick M. Vega is the Forensic and Integrity Services Leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

19 August 2024

Roderick M. Vega

How background checks can help prevent employment fraud

Employment fraud not only takes a financial toll due to the hiring of an ill-suited candidate but also increases risks of occupational fraud. The events that marked the beginning of the 2020s spurred unprecedented transformation by compelling organizations to accelerate their digital journey and enable remote working and business continuity. While it ushered in a new working world of tech-powered solutions, the accelerated pace of growth also left organizations vulnerable to heightened fraud risks.According to the Occupational Fraud 2024: A Report to the Nations issued by the Association of Certified Fraud Examiners (ACFE), out of 183 cases documented in the Asia-Pacific region, 12 (6%) of those were from the Philippines. This report analyzes 1,921 real cases of occupational fraud that were investigated between January 2022 and September 2023. However, it should be noted that the Asia-Pacific region reports the highest loss due to the cost of fraud compared to other regions in the study, with losses amounting to 1.2 million USD, compared to Western Europe who came in second with losses of 1 million USD.According to ACFE’s Report to the Nations 2024, 16% of the organizations that fell victim to fraud had chosen to onboard candidates despite the red flags that were raised during the background screening process, illustrating their dire need to hire.To mitigate such risks, HR departments can set the groundwork for organizational compliance efforts and cultivate an environment committed to following rules and policies. Through the support of HR personnel, compliance approaches can evolve from being reactive to proactive, enabling businesses to effortlessly integrate new regulations.Challenges of remote hiring and inadequate background checksDuring these challenging times, human resource functions find themselves struggling to bridge the talent gap in organizations through remote hiring. However, without the tried-and-tested safety measures such as employee background checks in place, fraudsters exploit the loopholes in the tech-enabled virtual interviews and skill-assessment processes to con organizations into hiring inadequately skilled, unscrupulous, or downright unqualified candidates for important positions through impersonation, proctored interviews, and so forth. The lack of continuous monitoring also results in issues such as multiple employment and compromised employee performance.In the realm of talent acquisition, HR teams play a pivotal role in ensuring compliance. They must ensure that the recruitment process adheres to employment laws, remains impartial, equitable, and free of discrimination. In an era where employment fraud is escalating, the onboarding process is particularly susceptible to modern fraud tactics, including overstated resumes, the use of deepfakes (artificial intelligence or AI-produced media where someone’s likeness or voice is replaced with another’s) during interviews, the submission of counterfeit documents, and undisclosed criminal histories. As such, HR can act as a safeguard by employing risk mitigation strategies to recruit candidates with verified qualifications and employment records.The high cost of occupational fraud and unverified hiresOrganizations share confidential information and valuable data with employees based on the trust established during the onboarding process. If the relationship is built on false pretense or with forged documents submitted by the candidate to improve their chances of being recruited, it can prove detrimental to the organization. All types of fraud are breaches of trust. Occupational fraud is the costliest and most common form of deception that takes place within organizations.The Report to the Nations 2024, which covered 1,921 cases of occupational fraud in 138 countries, reported losses of more than US$3.1 billion incurred by affected companies. Candidates who use fraudulent ways to get hired and submit inauthentic documents during pre-employment background checks are likely to operate with the same mindset during their employment, resulting in increased incidences of occupational fraud. The long-term repercussions of employment fraud A fraudulent candidate presents false information due to the lack of appropriate credentials to secure the position organically. With the advent of technology and remote jobs, fraudsters are creating deepfakes to impersonate qualified professionals and land jobs on their behalf. Such frauds can hamper overall team productivity, compromise business outcomes, and expose the organization to legal and reputational damage. While employees committing employment fraud stand to lose their jobs when their misdemeanors come to light, the organization incurs long-term reputational damage in the ordeal.Leveraging technology for comprehensive background checksWith the introduction of improved background check processes, HR teams can now utilize industry experience to thoroughly scrutinize candidates' resumes, documents, references, academic qualifications, and professional experience—all by one specialist. Automated HR compliance solutions can reduce the inaccuracies associated with manual background checks and offer faster processing times compared to traditional methods. This ensures that the hired candidates meet the company's requirements and adhere to its policies. While the primary objective of background checks is to detect fraud, they can also serve to assess cultural and value alignment, assisting HR in selecting candidates who resonate with the company's values. Employment fraud, like every other scam, is difficult to avoid. However, occurrences can be considerably reduced by implementing innovative solutions offered by employee background verification companies. Organizations can help prevent the hiring of unqualified professionals by investing in tech-forward tools for background verifications, leveraging data and cutting-edge innovations like face-matching and geo-tagging to address the loopholes in the employee verification process in a timely and cost-effective manner. Preemptive measures such as employee background checks can help reduce instances of fraud.Safeguarding the future of workThe importance of comprehensive background checks in the modern workplace cannot be overstated. As organizations navigate the complexities of a digitalized employment landscape, the need for robust verification processes becomes increasingly critical to prevent employment fraud and its associated costs. Advanced tools that harness centralized viewing are not only streamlining the background check process but are also enhancing the accuracy and integrity of hiring decisions. In addition, companies can explore engaging with third-party professionals with an extensive track record in fraud and integrity services. These measures are instrumental in building a trustworthy workforce that upholds the values and standards of the organization. Ultimately, by investing in and prioritizing thorough background checks as well as fostering a culture of compliance and ethical hiring, companies can protect themselves from the financial, operational, and reputational damages caused by employment fraud, ensuring a secure and prosperous future for their business and employees alike. Roderick M. Vega is the Forensic and Integrity Services Leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

12 August 2024

Noel P. Rabaja

Balancing act: Asia-Pacific CEOs embrace cautious optimism

The convergence of market dynamics, policy changes, and geopolitical tensions is forging a wave of cautious optimism among Asia-Pacific businesses. Following a period of spiraling costs of business and a significant drop in mergers and acquisitions (M&A) to multiyear lows in the region, the persistent challenges in the economy and of geopolitical uncertainties have dampened earlier expectations of faster recovery. Initially brimming with bullishness in early 2024, CEOs and investors are now recalibrating their forecasts to consider a more conservative view. Reflecting the region's more measured outlook, the Philippines earlier revised its own GDP growth forecast to a more conservative 6-7%, down from the previous 6.5-7.5% projection. The National Economic and Development Authority (NEDA) also raised the budget deficit ceilings until 2028 to provide greater flexibility in funding government infrastructure programs. Despite these headwinds, 55% of CEOs feel optimistic about their company’s revenue growth, and 61% remain confident in their profitability, as revealed by the latest 2024 EY CEO Outlook Pulse survey. The report surveyed 340 CEOs and 100 institutional investors across Asia-Pacific and found that CEOs are reworking their strategic playbooks. From mere business expansion goals a year ago, businesses in the region are now zeroing in on strategic investments in innovation and sustainability to achieve long-term resilience and better prepare for the future. However, while investors are keen to support genuine sustainability efforts, they also demand strategies that deliver long-term financial value. Achieving both the desired sustainability impact and positive financial benefits remains crucial to both CEOs and investors. Here are the key findings from the survey, providing salient insights for Philippine businesses. Competitive edge through technology and sustainability With AI's potential to boost productivity and provide a competitive edge, over a third (39%) of Asia-Pacific CEOs are prioritizing advanced technology, including AI, in their strategies for the next 12 months. To navigate the complexities of the digital landscape and ensure they reap the full benefits of advanced technologies, 35% of CEOs are also focusing investments in data management and robust cybersecurity. Over two-thirds of CEOs (68%) and investors (70%) believe that technology and AI can seamlessly bridge short-term financial goals with long-term sustainability. Meanwhile, over the next three years, CEOs are focusing their agenda on sustainability, with 49% of CEOs now seeing it as even more critical than a year ago. This shift to prioritize the green imperative rather than pay mere lip service is fueled by rising consumer demand for sustainable practices that extend beyond the point of sale. While consumers may balk at a "green premium," they still expect companies to implement comprehensive sustainability strategies across their supply chains. Stronger push for greater government action Asia-Pacific CEOs and investors stress the need for governments to take coordinated and consistent action to combat climate change, calling for greater infrastructure investments to spur regional growth and support the energy transition. A key barrier they emphasized is the region's lack of sophisticated public-private partnerships and innovative funding models. While many Asia-Pacific CEOs are pleased with current government infrastructure efforts, a vocal minority calls for more robust actions. They see subsidies, tax incentives, and direct investments as crucial for regional growth and energy transition, whereas mandatory reporting standards and financial penalties are less favored. Moreover, Asia-Pacific CEOs show willingness to accept tighter profit margins and higher costs to protect domestic manufacturing, though their commitment to such sacrifices is more cautious compared to leaders in other regions. M&As to accelerate transformation Asia-Pacific CEOs are seizing new opportunities through mergers, acquisitions, divestitures, and strategic alliances to advance their transformation agendas. Nearly all (99%) are planning or considering transactions this year, with 54% targeting mergers and acquisitions, far surpassing their counterparts in the Americas (36%) and Europe (40%). To ensure that sustainability is not just a box to tick but a core component of their strategic growth plans, companies are embedding sustainability considerations into their M&A framework. This forward-thinking approach aligns with the triple bottom line principle, balancing people, planet, and profit for long-term success. Three strategic actions The following are strategic actions CEOs can take to balance immediate productivity and profitability goals with long-term imperatives to ensure sustainable business growth and climate action alignment: Strength in numbers. By working together, e.g., by way of partnerships or strategic collaboration — particularly given the continuing challenges in the market — companies can have better access to the necessary funding and support from investors and governments to accelerate their transition toward more sustainable operations. Pursue public-private partnerships. When governments are deciding sustainability policy, CEOs, as key stakeholders, must actively engage with them. They are well-informed and ideally placed to advise on the most effective mechanisms to support policy objectives while minimizing economic downsides. Tell a better story. Investors are broadly positive about the outlook for dealmaking. However, they emphasize the need for companies to articulate why acquisition returns will surpass organic investments. They also want to see how integrated sustainability initiatives drive long-term value. Given the need for APAC CEOs to balance short-term productivity and profitability with longer-term imperatives, close collaboration and dialogue between companies, investors and governments will be key to sustaining economic growth while also addressing climate risk concerns. Noel P. Rabaja is the Strategy and Transactions Leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

05 August 2024

Philip B. Casanova and Ma. Airra S. Hernandez

How AI can sustain business continuity

Artificial intelligence (AI) is transforming the way we innovate—empowering machines to perform tasks that typically require human intelligence. It focuses on emulating human behavior and performance, from simple task automation to complex problem-solving and decision-making. As businesses continue to navigate an increasingly volatile landscape, the traditional, reactive approaches to continuity and crisis management no longer suffice. AI can help redefine organizational resilience by enabling companies to anticipate disruptions and fortify their operations against them.To adapt, businesses are increasingly turning to AI to transform their approach to Business Continuity Management (BCM). This article examines how AI's capabilities improve BCM strategies and foster a proactive approach to organizational resilience.The role of AI in BCMAI’s role in BCM goes beyond redefining business continuity procedures. It transforms the way organizations plan, detect, respond, and withstand business disruptions. Risk assessment, impact analysis and planningAI can be used to analyze large volumes of data to identify risks within an organization. It can also predict potential disruptions by analyzing patterns from past incidents. These capabilities reshape how organizations can prepare for unprecedented events and turn reactive measures into proactive strategies.AI can also be used in conducting Business Impact Analysis (BIA) and can streamline the identification of critical business functions, products and services, and the impact assessments of disruptions. It helps ensure that recovery efforts include interdependency requirements that are aligned with the criticality and recovery objectives of business functions, products, and services.AI can also assist in developing dynamic and adaptive disaster response plans by leveraging its acquired knowledge on various disaster scenarios and predicting their potential impacts on business operations. AI can further keep businesses abreast of regulatory shifts and ensures that BCM strategies are aligned with the latest mandates through automated compliance monitoring and reporting.Incident and crisis managementThe detection of threats or system failures becomes faster and precise with the use of AI-enhanced monitoring systems. The early-warning capability of such monitoring systems is critical for managing incidents before they escalate into large-scale business disruptions or crises. In fact, the Philippines, being one of the most disaster-prone countries in the world, has been incorporating AI and advanced technologies for monitoring seismic activities, volcanic eruptions, tsunami warnings, and typhoons for better disaster preparedness.Aside from detection, AI ensures availability of data through intelligent backup and recovery systems—safeguarding data integrity and facilitating swift restoration in the event of disruptions. AI-driven communication tools are also vital during a crisis where effective and timely communication is crucial. They provide stakeholders with immediate and accurate information when it is most needed.Exercise simulations and continuous improvementAI-driven simulations can train employees on emergency and response procedures as well as enrich the decision-making capabilities of Crisis Management Teams to help them prepare for real-world incidents and business disruptions.This capability parallels organizations in civil aviation that use AI in flight simulators where various flight conditions, system failures, and weather scenarios are simulated to train pilots in handling different situations. Similarly, military organizations also use AI in combat simulations and war games to create realistic training scenarios.Lastly, AI does not just respond to incidents—it learns from them. By analyzing BCM exercises and real events, AI provides actionable insights for refining continuity plans, ensuring that each iteration is stronger than the last. AI can help transform business continuity from reactive recovery to proactive preparedness, redefining organizational resilience.Challenges of AI-Driven BCMWhile AI offers significant advantages for BCM, it also presents several challenges that organizations must navigate.Resource requirements. AI systems require substantial funding for resources, such as technology, infrastructure and, ultimately, skilled talent. The use of AI needs specialized skills and knowledge to develop, manage, and interpret AI systems. Yet these times, the number of professionals in the field of AI are still limited.Reliability of data. AI systems require significant volume of high-quality data to work effectively, as insufficient or poor-quality data may result to inaccurate predictions. The AI systems may also inherit biases or result to unfair outcomes if data will not be managed properly.Decision-making capability. As AI systems are highly complex and lack transparency in their decision-making processes, organizations may find it difficult to understand and trust the recommendations made by AI. The extent to which decision-making should be automated and whether AI-driven decisions align with the organization's values and ethical standards are also some of the factors that organizations should consider.Maximizing AI to achieve resilienceTo harness AI's full potential in BCM and overcome challenges, organizations must facilitate thorough planning, stakeholder engagement, continuous monitoring, and the improvement of AI systems. Integration with existing systems is one of the key factors to ensure a holistic approach in enhancing every area of BCM. Moreover, it is essential to have subject matter experts in AI who can interpret and manage AI-generated intelligence to bridge the gap between data and decision-making.AI is not just complementary to BCM—it's a transformative initiative that is redefining the very essence of organizational resilience. As organizations start to embrace this AI-driven future, the ones who skillfully integrate AI systems into their business continuity strategies will not only survive disruptions but thrive in their aftermath. Philip B. Casanova is a Technology Consulting Principal and Ma. Airra S. Hernandez is a Technology Consulting Manager, both from SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

29 July 2024

Vivian C. Ruiz

How AI is transforming the accounting and auditing professions

Artificial intelligence (AI) can transform the business landscape for accountants and auditors. Given the fast-paced technological advancements in data mining; machine learning, which in turn fuels generative AI (GenAI); and quantum computing, which can speed up and enhance machine learning, the potential to transform the accounting and audit professions is immense.As technology continues to evolve, so do accounting and audit professionals as they gain access to huge amounts of data and leverage AI to streamline workflows. Besides data analysis, AI can also be used to improve various accounting and audit processes to save time, reduce human error, and increase efficiency. Despite AI's potential, fears persist that it could replace humans by performing tasks faster and more accurately. However, experts from the World Economic Forum (WEF) predict that automation will result in an increase of 58 million jobs, with two-thirds of which being highly skilled. While AI has the power to revolutionize accounting, its real strength lies in supporting the work of highly skilled professionals.Technological advancements and applicationsFollowing a technological lull, the past years saw an uptick of AI applications across various industries. This nascent period saw AI becoming more adept at handling, organizing, and analyzing large sets of both structured/quantitative and unstructured/qualitative data. The digital revolution, which is data-rich, has also sparked interesting AI use-cases in different fields. For example, lease accounting analysis is usually performed by humans; although, some pilot programs show that AI tools could execute the same task more quickly. That is, AI can possibly review up to 80% of the contents of simple lease arrangements, thus allowing humans to focus on more challenging tasks or, in this case, more complex leases.Nevertheless, AI cannot replace the judgment, experience, and creativity that humans bring to their work. Making value judgments and weighing opportunity costs are still out of the scope of AI.Predictive capabilities Overall, one of AI’s main strengths lies in its predictive capability. AI could help audit teams reasonably predict future risks and recalibrate their approaches. Additionally, AI presents interesting opportunities for accounting areas like fraud detection.Another lucrative area for AI is anomaly detection, the predictive value of which underscores AI’s evolution and allows auditors to work more efficiently. Consequently, organizations must ensure that their AI algorithms are compatible with their current infrastructures and workflows, which requires a balance in planning, training, and monitoring.Real-world interactions and implicationsAI’s second developmental phase, shaped by its interactions with the world, can be seen in voice recognition and similar tools. Other technologies like the Internet of Things (IoT), the network of physical devices and objects connected to the Internet that collect and share data, could enable AI to synergize with the material world. This shift is often called the Fourth Industrial Revolution.AI will impact not only audit work but also talent recruitment since it will demand new, diverse profiles, rather than replace existing talent. As such, the industry will need skilled individuals across a wide range of disciplines; moreover, they must understand accounting, its industry, and emerging technologies such as AI, blockchain, and machine learning. By keeping pace with technological advancements, organizations can continue to deliver high-value, high-quality audits. Building confidence in AI adoptionGoldman Sachs forecasted that global AI investment could reach 200 billion USD by 2025. However, survey data from the International Data Corporation (IDC) — a global market intelligence firm — showed that only 22% of organizations are planning to adopt AI tools, with 52% citing a lack of specialized talent as the top blocker. Moreover, an EY survey showed that 65% of CEOs believe that more work is needed to address various AI-related risks like data privacy, misinformation, and intellectual property.Building stakeholder trust takes time, and it requires a balanced approach that encourages innovation while minimizing risks. As such, EY has started shaping responsible AI guidelines and frameworks through the EY.ai Confidence Index, a tool that integrates ethical, societal, and public policy considerations. Driving sustainable growth through AIAI will reshape the global economy, which will come with new risks and opportunities. Organizations must identify opportunities, leverage AI, and create long-term value to gain a competitive advantage over their peers.Leaders face the critical task of navigating change management, clarifying AI-related misconceptions, and establishing AI governance. With responsible and people-centered approaches to AI, organizations can drive sustainable growth, empower talent, and transform the accounting and audit professions. Vivian C. Ruiz is the Vice Chair and Deputy Managing Partner of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

22 July 2024

Marnelli Eileen J. Fullon

GenAI: The gamechanger in creating lasting customer relationships

Generative AI (GenAI) is more than a mere buzzword or a fad; it’s an exciting new avenue that businesses are exploring to help reinvent customer experience (CX). In the push towards a more digitalized society in the 2010s and 2020s, customers have not only become more well-informed, but now also expect their experiences and interactions to be more personalized, efficient, and engaging, regardless of the channel they are using. This has prompted organizations to rethink their CX strategies and explore how new technologies can transform CX.GenAI early adopters have already leveraged the technology’s transformative power, avoiding the pitfalls of usual tech trends or fads by focusing their deployment strategies to create real, tangible business outcomes. According to the 2023 EY Innovation Realized Survey, nearly half of the C-Suite respondents cited sales and marketing as the function with the highest priority for deploying GenAI. However, there has also been a movement pushing for GenAI to play a pivotal role in the future of CX interactions, with three significant areas for transformation:Personalization at scale, where we can leverage AI to design hyper-personalized experiences for our customers;Automation and efficiency, where we leverage on AI’s ability to manage routine and repetitive tasks; and,Innovation and engagement, where AI can analyze behavior to predict and anticipate the needs of tomorrow and even leverage customer insights to create new ideas for products and services. It must be noted that the intent is not to replace human resources with AI, but instead create a collaborative environment where AI turns humans into superhumans. With AI’s help, companies will be able to redefine existing roles and lay the groundwork for a working model of the future where human ingenuity and creativity is at the forefront of the work we do in the field of CX transformation.GenAI's role in today’s business landscapeGenAI is now at the center of CX’s future, enticing businesses with new possibilities and opportunities to answer the complex challenges of today’s world. GenAI technology is already reshaping the business landscape by enabling companies to analyze and synthesize large datasets without the need for the heavy workloads that characterized yesterday’s analytics. This also extends to AI being able to integrate consumer preferences such as purchase history and individual interests into strategic considerations. By leveraging AI-driven analytics suites, businesses would no longer be required to spend considerable effort and manhours on data collection and analysis.Businesses can then focus their efforts on the next step of CX: personalization. People can focus their efforts on the actual design and implementation of personalized and targeted marketing and product or service suggestions and work towards driving real engagement with their target consumer bases. AI’s ability to not only analyze data, but make recommendations based on that analysis, helps businesses continuously adapt their approaches and strategies to the changing needs of their customers, ensuring that every interaction and touchpoint feels uniquely tailored and special.GenAI also offers considerable benefits in terms of operational efficiency and decision-making. By automating routine, time-consuming tasks such as customer data analysis and insights generation, business leaders can allocate their human resources to more strategic, creative, and customer-facing roles. This reorientation of people will lead to a more concerted effort to providing customers with the care and attention they deserve and create a more responsive and customer-centric approach. As organizations continue to integrate GenAI into their workflows, they will be able to build upon these examples and further innovate new ways to maximize both their people and GenAI, enabling themselves to deliver more value to their customers.As an example, a sports company aiming to revolutionize its marketplace and deepen consumer connections faced challenges in realizing its vision. Partnering with EY professionals for enterprise data and AI solutions, they were able to work together to address a range of CX transformation objectives, such as customer segmentation, churn prevention, and market strategy refinement. Utilizing AI-powered tools, they focused on a particular opportunity to optimize product substitutes. This strategic focus on personalization not only tripled their e-commerce sales but also captured market demand exceeding US$1.5 billion, enabled by an innovative app feature.Providing support for the new age of customer touchpointGenAI can also be used to redefine specific touchpoints across the customer journey, primarily through its ability to automate certain actions and interactions. AI chatbots are already being trained to engage in meaningful, context-rich dialogues with customers. Where we would once have needed customers to queue up to speak to agents, AI bots would be able to meet customers, analyze customer asks and sentiments to determine the assistance needed, and, if doable, assist the customer in utilizing self-service to solve simpler problems.The benefits are numerous, both for the customer and for the agent who is at the frontline of customer interactions:The AI chatbot initiating contact and analyzing the customer’s situation already cuts down significantly on the response time as encoding of the problem is already automated.AI analysis of the customer situation lets it identify who the call should be routed to and prevent customers from being passed around between lines. AI’s effect on follow-up or repeat calls are tangible as AI will be able to detect unresolved issues or reasons for calling. All these will have the knock-on effect of reducing stress and pressure on agents, meaning they will be happier, more productive, and more responsive to the needs of the customer, which in turn means happier customer relationships.Strategies and challengesIt should be noted that the implementation of GenAI, while promising in its potential, is not without its challenges. Ensuring data privacy, developing the requisite skill sets, and seamlessly integrating AI into existing systems are just some of the challenges businesses must overcome. It must be stressed that upholding transparency with customers on the use of AI in our business is a key element to ensuring that the implementation does not fall through. It is also essential to avoid common pitfalls, such as overlooking the customer experience or underestimating the importance of human oversight in AI-driven processes.Furthermore, as businesses embark on their GenAI journey, they must navigate the complexities of aligning AI initiatives with the broader organization. This does not just extend to operational, strategic, or technical integration, but also cultural adaptation. GenAI is a gamechanger, as much so for the employees of the business as for their customers because it impacts the way that work is done. Managing the change and the resistance to it will be a fundamental challenge to its implementation, which is why it is important for the business to establish clear communication channels and training programs right from the top. Only through effectively navigating these implementation challenges can businesses unlock the full potential of GenAI and transform it into a core driver of customer satisfaction and business success.The CX revolutionGenAI is set to be the newest driver of the digital and technological CX revolution. When done right, GenAI can enable businesses to deliver a modern and innovative customer experience that is personalized and uniquely emblematic of their company’s brand.However, while GenAI is a technology filled with untapped potential, it is still not without its risks. It remains imperative that businesses implement the technology properly, correctly, and responsibly. Misuse of GenAI can lead to detriments just as large and impactful as the potential gains.With that in mind, the question we should ask ourselves at this crossroads is: Are we content to let potential remain potential? Or are we ready to take steps into a great unknown in pursuit of something greater than what we have today? Marnelli Eileen J. Fullon is a Business Consulting Partner of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

15 July 2024

Rossana A. Fajardo

How AI is fundamentally changing recruitment

The recruitment process has always been a critical aspect of organizational success, serving as the means to acquiring the talent that drives innovation and growth. With the advent of artificial intelligence (AI), the talent acquisition landscape is undergoing a fundamental transformation. This article explores how AI is revolutionizing recruitment, the benefits and challenges it presents, as well as the strategies for striking the right balance between technology and human interaction.Recalibrating the hiring processThe pandemic has led to more companies using advanced HR technology to find and keep valuable employees. Because hiring the right talent is crucial for the success of any organization, this has increased the use of automated hiring tools to make better hiring decisions. These tools use AI to look at candidates more deeply than just their resumes, considering their potential for innovation and other important qualities, which helps to avoid bias and makes hiring more efficient.AI in hiring doesn't just make things more efficient; it also changes how companies plan for their future workforce. With AI, companies can predict what skills they will need and address any shortages by hiring or training people in advance. AI can look at job candidates from all over the world, helping companies find a diverse range of employees and create teams that are more innovative and successful in a global business setting. AI also helps make hiring fairer by reducing bias, leading to a more diverse and inclusive workplace.Digital hiring solutions could revolutionize the way organizations identify, assess, and recommend candidates. By analyzing talent data, AI can build predictive profiles that align with the company’s cultural context and can look at data to predict which candidates will fit the company's culture well, which could result in longer tenures and better performance. Leveraging AI for long-term successAI-powered digital accelerators are dynamic tools that continuously improve themselves by updating and adjusting their algorithms. This ensures they stay effective over time. These technologies can be smoothly incorporated into a company's overall management system, which helps the company look at hiring as part of the big picture. They make finding candidates faster and help companies make smarter hiring choices.AI in talent acquisitionAI is changing how companies hire people, but it's not perfect. Relying too much on AI might mean missing good candidates if the AI doesn't understand all the details in resumes. People also worry about losing the personal side of hiring, which is about knowing people and how they work together. To fix these issues, companies are using both AI and human judgment together. Examples are as follows:Resume Screening with Human Review: AI software initially screens resumes to filter out candidates based on specific criteria such as skills, experience, and education. Recruiters then manually review the shortlisted candidates to consider additional factors that AI might overlook, such as unique experiences or potential for growth.AI-driven Assessments with Human Interviews: Candidates might be asked to complete online assessments powered by AI, which evaluate their skills, personality, and cognitive abilities. The results are then reviewed by hiring managers who conduct personal interviews to get a better sense of the candidate's soft skills and cultural fit.Chatbots with Recruiter Follow-ups: AI chatbots can engage with candidates for initial data collection and answering FAQs. Recruiters can then follow up with candidates who pass this initial screening for more in-depth conversations and relationship building.Predictive Analytics with Human Decision-making: AI can analyze large datasets to predict which candidates are most likely to succeed in a role. Hiring managers use these insights to inform their decisions but also rely on their professional judgment and experience when making the final call.Automated Sourcing with Personalized Outreach: AI tools can identify potential candidates from various sources such as job boards, social media, and professional networks. Recruiters then personally reach out to these candidates to ensure a more human touch in the recruitment process.Video Interviews with AI Analysis and Human Review: Candidates might be asked to record video interviews that AI software analyzes for speech patterns, facial expressions, and body language. Recruiters review these analyses alongside the actual video to make more informed decisions about the candidates. By integrating AI tools with human expertise, companies can benefit from the efficiency and data-driven insights of AI while still maintaining the critical human elements of intuition, empathy, and complex decision-making that are essential for successful talent acquisition.Additionally, not all companies can afford to use AI for hiring, especially if they don't hire often or the jobs are very specialized. To help with this, there are new AI services that let companies pay only when they use them, making AI available to more businesses.AI’s impact on Filipino RecruitersAccording to the 2024 Work Trend Index from Microsoft Corp. and LinkedIn, 89% of Filipino leaders think their organization must leverage AI to stay competitive in the global market. The Philippines, like many other countries, has been adopting AI in various aspects of recruitment including 1) Automated Resume Screening, 2) Use of Chatbots for Candidate Engagement, and 3) AI for Candidate Sourcing. The adoption of AI in recruitment and retention in the Philippines reflects a broader global trend towards digital transformation in HR. However, the extent of AI adoption can vary widely among organizations, depending on their size, industry, and resources. It's also important to note that while AI can significantly enhance HR functions, it is typically used in conjunction with human expertise to ensure that the recruitment and retention processes remain balanced and fair.Striking the right balanceAI is fundamentally changing recruitment by providing innovative solutions that enhance efficiency, reduce bias, and improve the overall candidate experience. However, the successful integration of AI in recruitment requires a holistic approach that maintains the human element, ensuring that the technology serves to complement rather than replace the talent that is vital to the acquisition process. Understanding how AI is reshaping the hiring landscape is crucial for recruiters and chief human resources officers (CHROs) to meet evolving business and employee expectations. As AI and the HR function continue to evolve, organizations must balance traditional competencies like risk and compliance while paving the way for future innovations. Rossana A. Fajardo is the Consulting Leader of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

08 July 2024

Rajiv Kakar

Key GenAI cybersecurity challenges and risk mitigation strategies

Generative artificial intelligence (GenAI) has the capacity to understand, learn, adapt, and implement knowledge across a broad range of tasks at a level equal to or beyond human capability. Unlike Narrow AI, which is designed to perform a specific task such as voice recognition or recommendation algorithms, GenAI can apply intelligence to any problem, and be able to perform any intellectual task that a human being can do.While it holds extraordinary promise for the future, GenAI comes shrouded in various concerns, extending from ethical dilemmas to security susceptibilities. This article will explore some of the key challenges of GenAI and risk mitigation strategies from a cybersecurity perspective.Key challenges of GenAI A persistent issue of AI is the lack of transparency, frequently referred to as the black box problem. It’s difficult to understand how complex AI models make decisions, and this can create a security risk by allowing biased or malicious behavior to go unchecked.Businesses are rapidly exploring GenAI solutions with little forethought on the security implications on the rest of the IT estate. There is currently no limit for the complexity of attack surfaces of AI systems or other security abuses enabled by AI systems. In addition, AI models heavily rely on third-party technologies, where the large language models (LLMs) like ChatGPT are outside the control of an enterprise. Consequently, the learning parameters where AI systems may be trained for decision-making outside an organization’s security controls or trained in one domain and then “fine-tuned” for another raises concerns about intended and actual usage.Datasets used to train AI systems may become detached from their original and intended context, or may become stale or outdated relative to deployment. This introduces the problem of decisions made on incorrect data. Moreover, changes during training of models may fundamentally alter AI system performance and outcomes.LLMs typically capture more information than they process, and considering the privacy policy of ChatGPT, the platform may regularly collect user data such as IP address, browser info and browsing activity. These may be shared with third parties, competitors, and regulators. The use of pre-trained models that can advance research and improve performance can also increase levels of statistical uncertainty and cause issues with bias management, scientific validity, and reproducibility.On top of the computational costs for developing AI systems and their impact on the environment and planet, it is very difficult to predict failure modes for the emergent properties of large-scale pre-trained models. AI systems may require more frequent maintenance and triggers for conducting corrective maintenance. Additionally, it is challenging to perform regular AI-based software testing, or determine what to test, since AI systems are not subject to the same controls as traditional code development.“Artificial stupidity,” the term used to describe situations where AI takes decisions that may seem illogical to humans due to its inadequate understanding of the real-world context, presents another challenge. Talks of AI singularity, a hypothetical scenario where AI outstrips human intelligence, have also started to gather momentum. Critics argue that a super-intelligent AI poses a real existential risk, as it might spin out of human control. The dehumanizing effects of GenAI are another cause for concern. Over-reliance on AI risks devaluing human skills and minimizing human interactions. Moreover, the widespread application of GenAI may give rise to economic disparity, as the benefits of AI may not distribute evenly across society. Finally, the misuse of GenAI, particularly for harmful purposes like illegal surveillance, spreading propaganda, or weaponization, cannot be overstated.The already dense and complex AI landscape is further complicated by substantial hype and a multitude of diverse solutions. The resulting application environment is scattered with multiple third-party technology solution components which require thorough vetting in enterprise contexts. Types of GenAI attacksThere are various types of GenAI attacks manifesting across enterprises. Adversarial attacks involve manipulating an AI model's input data to make the model behave in a way that the attacker desires, without triggering an alarm. For example, an attacker could manipulate a facial recognition system to misidentify an individual, allowing unauthorized access. A data poisoning attack involves maliciously manipulating the data used to train AI models. By introducing false or misleading data into the training dataset, attackers can compromise the accuracy and reliability of AI systems. This can lead to biased predictions or compromised decision-making. On the other hand, a model theft or model inversion attack may attempt to steal and/or reverse-engineer AI models to obtain sensitive information. In a transfer learning attack, an attacker manipulates an AI model by transferring knowledge gained from one domain to another, resulting in the AI system producing incorrect or harmful outcomes when applied to new tasks. In input manipulation, interacting with a chatbot or an AI-driven system can lead to incorrect or harmful responses simply by changing words or asking tricky questions. For instance, a medical chatbot might misinterpret a health query, potentially providing inaccurate medical advice.AI can also be used by malicious actors to automate and enhance their cyberattacks. This includes using AI to perform more sophisticated phishing attacks, automate the discovery of vulnerabilities, or conduct faster, more effective brute-force attacks.GenAI security risk managementTo mitigate attack vectors, organizations must establish comprehensive regulations and standards that can guide the responsible use and development of GenAI. A GenAI Risk and Control framework can be very helpful in highlighting areas of vulnerability and risk mitigation in some of the following areas: Threat recognition. Identify possible threats GenAI might enable, such as autopilot system hacking, data privacy threats, decision-making distortion, or manipulation.Vulnerability Assessment. Evaluate weak spots in the system that might be exploited due to GenAI characteristics.Risk Impact Analysis. Look into potential implications if any threats were actualized (financial implications, impact on company reputation, etc.)Mitigation Strategy Development. Develop strategies to mitigate these risks, whether that means strengthening your network security system, creating backup systems, securing data privacy with improved encryption, or continuously auditing & updating the AI’s programming against potential manipulation.Contingency Planning. Develop a plan for responding to any breaches or issues that occur, despite mitigation efforts. Include steps to fix the issue, mitigate the damage, and prevent future occurrences.Constant Monitoring & Updating. GenAI systems should be regularly monitored and updated to patch vulnerabilities and keep up with the evolving threat landscape.Training & Awareness. Ensure that all users of GenAI systems are properly trained on security best practices and are aware of the potential threats.External Cooperation. Cooperate with other firms and institutions to share threat intelligence and promote a collective defense strategy.Regulation Compliance. Ensure compliance with all applicable laws and regulations surrounding data security and AI, such as general data protection regulation (GDPR).Incident Response Plan. Prepare a clear and concise plan to follow when a breach occurs, which includes reporting breaches, managing and controlling the situation.Organizations must consider upgrading cloud security and moving towards zero trust principles, whereby every access request is authenticated, authorized and validated every time. Antivirus systems should be upgraded from the current norm of using a pre-programmed list of known attack vectors (signature based) to systems that can observe unusual patterns and alert on deviations (anomaly based). Embracing GenAI monitoring by introducing the appropriate tools allows organizations to monitor AI prompts and see that they do not deviate from original scenarios.Review and strengthen security around a GenAI application stack emphasizing on integration points between systems (API’s) and identify AI systems and assets by drawing up a plan of usage. Organizations can assign a dedicated team to test AI models at base and application level, as well as introduce moderation and control on user developed applications, tools and products. Any experimental or uncontrolled work on GenAI within the enterprise must be monitored.Applying these strategies can minimize the risks associated with GenAI and help efficiently manage cybersecurity.Navigating AI pitfalls by mitigating risksWhile the potential of GenAI is undeniable, a cautious, forward-thinking approach is crucial to navigating its potential pitfalls. It is imperative to establish comprehensive risk mitigation, standards, and frameworks that can guide the responsible use and development of GenAI. Rajiv Kakar is a Technology Consulting Principal of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

2024